Investors unlikely to agree that Microsoft CEO Nadella is overpaid

The controversy over excessive CEO pay this week hit Satya Nadella, Microsoft's (MSFT) leader for the past nine months. Institutional Shareholder Services, a well-known advisory firm, urged big investors to oppose Nadella's 2014 compensation package in a non-binding vote at Microsoft's annual meeting next month.

Nadella, appointed in February as only the third CEO in Microsoft history, got a package of cash and restricted stock worth almost $91 million, according to Institutional Shareholder Services. Much of the stock won't vest for at least five years, but ISS said the total was far more than CEOs of comparable companies earned and not tied closely enough to the performance of Microsoft's stock.

Although ISS has considerable sway with mutual fund, hedge fund and pension fund mangagers, the criticism isn't likely to convince many to vote down the pay package even in the purely advisory vote at the annual meeting.

That's because after years of stagnation and missteps, Microsoft under Nadella finally seems to be moving quickly to regain relevance in the fast-growing mobile and cloud Internet segments of the technology markets. The new CEO has released versions of the company's popular Office software for Apple (AAPL) and Google (GOOGL) devices, slashed prices in cloud offerings to undercut Amazon (AMZN) and accelerated the pace of developing the next version of Windows.

Microsoft defended the pay package, valuing Nadella's compensation for the year at less than $12 million and noting that the stock awards ISS criticized would be deferred for five to seven years and would increase or decrease based on how well the company's stock performed.

Nadella would get 600,000 shares in 2019, 2020 and 2021, a total of 1.8 million shares, if Microsoft outperformed 60% of the stocks in the S&P 500 Index, for example. But if Microsoft only beat half in one of those years, the award for that year would drop to 450,000. And if it only beat 30% or fewer, Nadella would get 150,000 shares a year.

Microsoft shares have risen 47% since August 2013, when then-CEO Steve Ballmer announced he wanted to leave, and 31% since Nadella was named as his successor on Feb. 4.

Unlike Microsoft's first two CEOs, Ballmer and Bill Gates, Nadella is not a major shareholder or a billionaire, no doubt figuring into the board's decision to make the larger stock award.

"The Board designed a compensation structure comprising competitive annual compensation and a one-time long-term equity grant that motivates our CEO to create sustainable long term shareholder value by providing him with the opportunity to share in those gains and build ownership in the company over the next seven years," Chairman John Thompson explained in a letter to shareholders.

Relatively speaking, the pay of some other tech CEOs is much harder to justify. Oracle (ORCL) CEO Larry Ellison, a billionaire many times over and owner of 26% of the company's shares, received total compensation of $67 million last year, $80 million in 2013 and $96 million the year before.

Investors may also side with Microsoft when considering the correct group of peer CEOs to choose for comparison to Nadella's pay. Both Microsoft's board and ISS included tech companies like Amazon, Oracle and Hewlett-Packard (HPQ). But ISS left Apple, Facebook (FB), Google and others Microsoft included on its list in favor of non-tech companies such as Caterpillar(CAT), Procter & Gamble (PG) and JPMorgan Chase (JPM).

And while ISS is influential, investors don't follow its recommendations all the time. The firm recommended voting against corporate CEO pay plans this year at 13% of companies in the Russell 3000 Index, according to the most recent data compiled by compensation consulting firm Semler Brossy. Most companies still got a majority of shareholder votes in favor of the pay plan, although support was 28 percentage points lower on average when ISS urged opposition.